New Strategies for Emerging Domestic Sovereign Bond Markets in the Global
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Annex C for details). Nonetheless, this integrated framework should be
sufficiently flexible and pragmatic to absorb various shocks so as to overcome crisis situations. This may involve a temporary deviation from a pre-announced debt issuing program based on a strategic benchmark. The specification of a benchmark portfolio represents the desired
of the government debt portfolio. The implementation of the resulting debt strategy has therefore a direct impact on the development and structure of domestic bond markets. For example, the announced debt strategy may involve reducing the share of floating debt, increasing the share of inflation linkers and local currency bonds, and lengthening the maturity of domestic debt. The resulting structure of domestic bond markets is therefore based on a risk-based approach that takes the weak structural fundamentals of emerging markets (such a relatively high volatile environment and other sources of vulnerability) better into account. As a result, the risk-based approach to public debt management by emerging markets contributes to both enhanced financial stability and a more successful participation in the global financial landscape. Vice versa, liquid domestic bond markets facilitate the risk-based approach to public debt management as well as better risk management by financial intermediaries.
POLICY IMPLICATIONS FOR LATIN AMERICA AND OTHER EMERGING MARKETS
The increasingly active participation by debt managers from Latin America, Asia, Africa and other emerging markets in OECD-led policy forums 42
demonstrates clearly that emerging market policymakers are giving a higher priority to a risk-based public debt management strategy based on OECD’s leading practices in this policy area. Because of its link to domestic bond markets, progress in developing bond markets can be used as an indirect gauge of the success of implementing a risk-based approach to public debt management. As noted, in the period 1997-2005, the stock of domestic currency debt of emerging markets has nearly tripled, to over $3 trillion, while total outstanding domestic debt securities grew from 20 per cent of GDP to almost 40 per cent, while foreign debt has been reduced (see Graphs 13-16 below). This shift from
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The principal forums are the Annual OECD/World Bank/IMF Global Bond Market Forum, and the Annual OECD Global Forum on Public Debt Management in Emerging Government Securities Markets. 31 Blommestein and Santiso: New Strategies for Emerging Domestic Sovereign Bond Markets Published by The Berkeley Electronic Press, 2007 external to domestic debt has helped reducing the risk resulting from currency mismatches. Nevertheless important challenges remain. Domestic markets vary greatly in size (the largest being the Brazilian and Mexican ones, respectively 74 per cent and 21 per cent of GDP by the end of 2005) and – as in many OECD jurisdictions-- they are dominated by the public sector. Public debt-to-GDP ratios stood at only a median value of 46 per cent at the end of 2005. There is therefore ample room for deepening domestic debt securities. In some countries exposure to forex risk fell significantly (to 13 per cent of GDP in South Africa in 2004, for example 43 ), while others managed to reduce it significantly including Brazil and Russia (falling to 37 per cent and 34 per cent
44 of GDP in 2004, respectively). In Turkey the foreign currency-linked portion of debt fell from 58.1 per cent at end-2002 to 38.5 per cent in September 2006.
45 But in some countries exposure still exceeds 50 per cent of GDP at the end of 2006, namely in Indonesia (55 per cent), Philippines (72 per cent), and Argentina (111 per cent). 46 In other words, in spite of impressive progress, forex risk associated with foreign debt remains an important challenge for many emerging markets 47 .
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On South Africa’s cost of capital and strategies to reduce it see the several studies produced by the OECD Development Centre. See Grandes and Pinaud, 2004 and 2005. 44
Russian sovereign external debt stood in 2006 at less than 8 per cent of GDP, down from 140 per cent of GDP in 1998. 45
Source: Submission to the OECD Working Party on Debt Management. 46
According to IMF statistics.
47 . See for a detailed analysis of African debt stocks, Hans J. Blommestein and Greg Horman (2007), Government Debt Management and Bond Markets in Africa, Financial Market Trends, No. 92, vol. 2007/1. 32
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